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2016 (12) TMI 1903 - AT - Income TaxDeemed dividend under section 2(22)(e) - assessee is registered and also beneficial shareholder and also Director of MCPL(a private limited company in which public are not substantially interested) holding 50% shares of MCPL, as well the assessee is partner in partnership firm MRED having 50% share in the profits of the afore-said partnership firm - HELD THAT - As partners of MRED who are also the registered and beneficial shareholders of MCPL holding 50% shares each had not benefited out of the funds transferred by MCPL to MRED will be an fallacious argument and is hereby rejected keeping in view facts and circumstances of this case as set out above in preceding para s. It is one of the direct case whereby the partners of the firm MRED has benefited out of the huge interest-free advances being given by MCPL to MRED and hence it is thus, the direct infringement / violation of the provisions of section 2(22)(e) of the Act. In our considered view , the AO has rightly invoked the provisions of Section 2(22)(e) of the Act and has brought to tax the said loans and advances granted by MCPL to MRED, within the deeming fiction of Section 2(22)(e) of the Act by terming the same as deemed dividend in the hands of the partners of the firm MRED i.e. Mr. Peter Vaz and Mr.Edgar Braz Afonso who are registered as well beneficial shareholder of MCPL and being beneficiaries of the amount advanced by MCPL to MRED as set out above , on substantive basis keeping in view the decision of Hon ble Bombay High Court in the case of CIT v. Universal Medicare Private Limited 2010 (3) TMI 323 - BOMBAY HIGH COURT Assessee could not prove the business nexus and business purpose for advancing huge amount of loan and advances by MCPL to MRED to the tune of Rs. 50.99 crores from assessment year 2006-07 to assessment year 2012-13 and in any case the Assessing Officer has given set off / credit for all the inter-se transactions between MCPL and MRED wherein business nexus was established / proved by the assessee and also the AO has duly taken note of restricting the additions u/s 2(22)(e) of the Act keeping in view accumulated profits held by MCPL as per mandate of Section 2(22)(e) of the Act . We are of the considered view that under S.2(22)(e) of the Act liability to tax attaches to any amount taken as loan and advance by the share holder from a controlled company to the extent it possesses accumulated profits at the moment the loan is borrowed and it is immaterial whether the loan is repaid before the end of the accounting year , as was held by Hon ble Apex Court in the case of Smt Tanulata Shyam 1977 (4) TMI 3 - Supreme Court .Decided against assessee. Additions have been made in the case of Model Real Estate Developers on the protective basis , while substantive additions have been made in the hands of Mr Peter Vaz and Mr Edgar Braz Afonso and their spouse , wherein we have confirmed the substantive additions made by Revenue in the hands of Mr Peter Vaz and Mr Edgar Braz Afonso and their spouse with respect to loans and advances granted by MCPL to MRED, as per detailed discussions and reasoning as set out in preceding paras of this orders. Since, we have confirmed substantive additions the protective additions made by Revenue on the identical issue in the hands of MRED shall not survive w.r.t. to loans and advances granted by MCPL to MRED. Thus, we order deletion of additions made on protective basis in the hands of MRED for the assessment years 2007-08 to 2012-13 Transfer of funds to the assessee by SIPL - As per AO huge amounts have been advanced by the said company SIPL to the assessee without any business purposes/nexus and hence is clearly hit by deeming fiction created u/s 2(22)(e) of the Act to be treated as deemed dividend - HELD THAT - We do not find any infirmity in the order of the AO as the AO has rightly brought to the tax said advances which are in the nature of loan and advances being given out of the accumulated profits by the company SIPL for the individual benefit of its registered cum beneficial share holder Mr. Edgar Braz Afsono i.e. the assessee, which loans and advances were disbursed by SIPL to the assessee-shareholder instead of declaring dividends out of accumulated profits and hence dividend distribution tax is evaded to be paid to the Government had the said amount of advances would have been distributed by SIPL as dividend to its shareholders. We have also observed that the appellate order of the learned CIT(A) does not hold merit and hence cannot be upheld as learned CIT(A) merely accepted the contentions of the assessee without any evidences , which in-fact pained us after reading the appellate orders of the learned CIT(A). We, therefore , order that the appellate order of learned CIT(A) be set aside as the same is not sustainable at law as the learned CIT(A) merely accepted the contentions of the assessee without any evidences and has not brought on record material to disprove the contentions of the AO , while on the other hand the AO has elaborately explained with cogent reasons in his assessment order as to why the provisions of Section 2(22)(e) of the Act are applicable in this instant case of the assessee and how the said loans and the advances which were given without any business purposes by SIPL to the assessee out of its accumulated profits will be hit by the Section 2(22)(e) of the Act to be brought to tax as deemed dividend, and hence we set aside the order of the ld.CIT(A) and uphold/affirm the assessment order of the AO and since Mr. Edgar Braz Afonso is the registered and beneficial share holder of the company SIPL holding substantial interest in the said company SIPL holding 50% of shares of SIPL (a company in which public are not substantially interested) , the ratio of the decision of t.Universal Medicare Private Limited 2010 (3) TMI 323 - BOMBAY HIGH COURT is directly applicable to the instant case and hence the AO has rightly brought to tax the said amount of loans and advances granted by SIPL in favour of the assessee without any business purposes and nexus, within the ambit of section 2(22)(e) of the Act by bringing to tax the same as deemed dividend , to the extent SIPL possessed accumulated profits, which assessment order of the Assessing Officer we confirm and sustain. Decided against assessee.
Issues Involved:
1. Applicability of Section 2(22)(e) of the Income-tax Act, 1961. 2. Validity of proceedings under Section 153C of the Act. 3. Satisfaction note and jurisdictional aspects under Section 153C. 4. Admissibility of additional evidence under Rule 46A of the Income-tax Rules, 1962. 5. Condonation of delay in filing Cross Objections. Issue-wise Detailed Analysis: 1. Applicability of Section 2(22)(e) of the Income-tax Act, 1961: The primary issue revolves around whether the amounts advanced by M/s Models Construction Pvt. Ltd. (MCPL) to M/s Models Real Estate Developers (MRED) and by Sonesta Inns Pvt. Ltd. (SIPL) to Mr. Edgar Braz Afonso qualify as "deemed dividend" under Section 2(22)(e) of the Income-tax Act, 1961. The Assessing Officer (AO) observed that MCPL advanced substantial amounts to MRED, where Mr. Peter Vaz and Mr. Edgar Braz Afonso held significant shares and were also partners. Similarly, SIPL advanced amounts to Mr. Edgar Braz Afonso, who held 50% shares. The AO concluded that these advances were not for business purposes but for the benefit of the shareholders, thus invoking the deeming fiction of Section 2(22)(e). The Tribunal upheld the AO's decision, noting that the advances were substantial and lacked sufficient business nexus. It was observed that the funds were used to build a land bank in MRED, benefiting the partners, who were also shareholders in MCPL. The Tribunal rejected the argument that the funds were transferred by the bank without the company's instructions, emphasizing that the company had authorized such transfers under the guarantee deed. 2. Validity of proceedings under Section 153C of the Act: The assessees challenged the validity of the proceedings under Section 153C, arguing that no incriminating material was found during the search and that the mandatory satisfaction was not properly recorded. The Tribunal noted that the books of accounts of MCPL and MRED, found during the search, contained details of the transactions and were incriminating qua the assessees. The Tribunal also observed that the AO had recorded satisfaction before invoking Section 153C. 3. Satisfaction note and jurisdictional aspects under Section 153C: The assessees contended that the satisfaction note was not properly recorded by the AO of the searched person. The Tribunal found that the satisfaction note was recorded and provided to the assessees. It was also noted that the AO for MCPL, MRED, and the assessees was the same, and the satisfaction note was present in the files of the searched person. The Tribunal rejected the argument that the lack of a satisfaction note invalidated the proceedings. 4. Admissibility of additional evidence under Rule 46A of the Income-tax Rules, 1962: The Revenue argued that the CIT(A) admitted additional evidence without forwarding it to the AO for comments, violating Rule 46A. The Tribunal found that the assessees had certified that the evidence was presented before the AO and CIT(A). Therefore, the Tribunal rejected the Revenue's contention and held that Rule 46A was not violated. 5. Condonation of delay in filing Cross Objections: The assessees filed Cross Objections with a delay of 248 days, citing wrong professional advice. The Tribunal noted that the grounds raised were not presented before the lower authorities and that the delay was substantial. The Tribunal found the reasons for the delay unconvincing and did not condone the delay, dismissing the Cross Objections as unadmitted. Summary of Tribunal's Decisions: - The Tribunal upheld the AO's decision to tax the advances as deemed dividend under Section 2(22)(e) in the hands of Mr. Peter Vaz, Mr. Edgar Braz Afonso, and their spouses. - The Tribunal confirmed the validity of proceedings under Section 153C, finding that the satisfaction note was properly recorded and that incriminating material was found during the search. - The Tribunal rejected the assessees' challenge to the jurisdiction and satisfaction note under Section 153C. - The Tribunal found no violation of Rule 46A regarding the admission of additional evidence. - The Tribunal dismissed the Cross Objections filed by the assessees due to the substantial delay and lack of convincing reasons for the delay.
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